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The Construction Industry Scheme (CIS) was originally designed to prevent tax evasion among construction workers. To enforce compliance, CIS penalties were implemented. Ensuring you are CIS–compliant is crucial, as the penalties can easily add up. This article outlines the common mistakes you need to know and avoid, how to appeal against the penalty, and more.
What are CIS Penalties?
CIS penalties are fines imposed by HMRC on non-compliance under the scheme. They only apply to contractors and subcontractors in the construction industry, not to regular employees, as the latter is covered under the Pay as You Earn (PAYE) system.
Penalty rates can accumulate up to £3000 over time. Violations can result in the sub contractor losing gross payment status, which means paying income tax and National Insurance contributions upfront, or even worse, facing legal proceedings.
Useful read: Construction Industry Scheme (CIS) Scope and Exemptions
Tax Deductions vs. CIS Retentions: Unless you are paid in gross, your CIS paycheck is deducted at 20% (CIS-registered) and 30% (non-registered). These are the regular tax withheld from your wage. CIS retention is different—it is the amount contractors are withholding from the overall pay (portion is contracts-based) to account for any issue after project completion.
Deliberate vs. Non-Deliberate Violation
HMRC bases the penalty rates according to the nature of violation—non-deliberate or deliberate. Non-deliberate violations are usually errors due to carelessness despite taking reasonable care. These kinds attract lesser penalties. On the other hand, deliberate non-compliance is bound to heavier charges.
Types of CIS Non-Compliance and Their Penalties
CIS penalties depend on the type of non-compliance. Here are some of the most common:
Late Filing of CIS Returns
Contractors are legally obliged to file CIS returns per month. Failure to submit your CIS tax returns on time triggers immediate fines. The increase of the penalty starts at £100 from the first day. The rest are as follows:
- 1 to 2 months late: A flat fee of £200
- 3 to 12 months late: A daily penalty of £10 per day, up to a maximum of £900
- Over 12 months late: A further penalty of up to £300 or 5% of the taxes due, whichever is higher
Know the CIS Payment Deadline! As soon as you register for CIS, you will need to file a return every 19th of the month, detailing your subcontractors’ pay and deductions. For timely payments, pay tax by the 22nd of the same month. You are still required to submit a ‘nil return’ or notify HMRC even if you have not paid any subcontractors.
Incorrect Returns
Deducting taxes at the wrong rates also incur penalties depending on the level of care taken in preparing the return. CIS penalties for incorrect returns vary:
- Careless mistakes: 15 to 30% of the tax due
- Deliberate mistakes: 35 to 70% of the tax due
- Deliberate and concealed mistakes: 50 to 100% of the tax due
Aside from CIS penalties, incorrect tax deductions can delay any refund or adjustments as well as reduce trust from your staff on payroll and tax matters.
On Employment Status
IR35 status determination is most crucial amongst CIS workers. IR35 identifies those who are employed and genuinely self-employed for tax purposes. If you are a paying end client, this responsibility falls to you.
Incorrect status determination or failure to declare can be penalised up to £300, with daily penalties of up to £60 until the declaration is made. These penalty rates can reach £3000 for some.
On Payment and Deduction Statements (PDS)
If you are a contractor, you need to supply a PDS copy to your subcontractors within 14 days of the tax month’s closing. Otherwise, you will face a penalty of up to £300, plus daily fines of £60 until the copies are provided. Check out our complete guide on CIS payment and deduction statements.
How to Calculate Your Penalty Percentage
CIS penalties are calculated based on your tax liability, length of lateness, nature of violation, and other factors. HMRC’s Estimate Your Penalty Online Tool can help you determine your potential fines.
You can also find how much penalty you are due in tax returns. Even without tax, you may incur penalties based on your behaviour and whether reporting your taxes was unprompted (incurs lower penalty) or prompted (incurs higher penalty).
Unprompted Deliberate Violations:
- 20-70% penalty (minimum £1,500) for deliberate violations
- 30-100% penalty (minimum £3,000) for deliberate and concealed violations
Prompted Deliberate Violations:
- 35-70% penalty (minimum £1,500) for deliberate violations
- 50-100% penalty (minimum £3,000) for deliberate and concealed violations
Cooperation with HMRC can reduce penalties:
- Up to 30% reduction for clarifying errors
- Up to 40% reduction for assisting in accuracy
- Up to 30% reduction for providing records access
For a better understanding, here is an example:
John was prompted to disclose. It was shown his late filing was done deliberately, which means a 35 to 70% penalty from his tax liability. However, he collaborated enough during the disclosure process, and HMRC decided the quality of his disclosure cooperation to be 100 per cent.
Penalty for Prompted Disclosure of Deliberate Violation = 35 to 75%
Penalty for Prompted Disclosure of Deliberate Violation = 35 to 75%
| To Arrive At | Computation | Result | |
|---|---|---|---|
|
Penalty Percentage Rate |
Maximum minus minimum penalty percentage |
75% – 35% |
35% |
|
Penalty Reduction Percentage |
Penalty percentage multiplied by
disclosure quality reduction percentage |
35% x 100% |
35% |
|
Increased Penalty Percentage |
Maximum penalty percentage
minus reduction percentage |
70% – 35% |
35% |
|
Increased Penalty Percentage = 35% |
|||
HMRC calculates the penalty by first finding the difference between the maximum (70%) and minimum (35%) penalty percentages, which is 35%. This amount is then reduced based on the disclosure quality. If the disclosure is complete, the penalty reduction remains 35%. Finally, this reduction is subtracted from the maximum penalty, leaving an increased penalty of 35%.
Common Reasons for Late CIS Filing
HMRC recognises reasonable excuses or reasons for late CIS filing. Some of those reasons include:
- lack of funds
- health or personal matters
- major life events
- dependence on third parties
In these situations, HMRC may accept your excuse, but you need to notify them as soon as you expect to struggle with your CIS tax obligations. The sooner you communicate, the more likely your excuse will be accepted.
HMRC does not typically offer leniency just for lack of funds, but if you have a history of timely filings, you might have more flexibility. Ultimately, it depends on your specific situation, so what is accepted for one person may not apply to you.
How to Avoid Late CIS Filing
To avoid late CIS filing, stay proactive and organised. Here are some helpful tips to keep in mind:
- Keep Accurate Records: Maintain up-to-date and accurate records of payments, deductions, and any relevant tax information throughout the year.
- Set Reminders: Use digital tools or calendars to set reminders well in advance of the filing deadline, ensuring timely submission.
- File Returns Early: Do not wait until the last minute to file—submit your returns as soon as possible to allow time for corrections if needed.
- Delegate or Automate: Consider using accounting software or hiring a reliable accountant to handle filings, reducing the risk of missing deadlines.
- Stay Informed: Keep up to date with any UK taxation changes to ensure full compliance and avoid mistakes that could lead to penalties.
- Plan for Financial Shortfalls: If you anticipate any financial difficulties, contact HMRC early to discuss payment plans or other support options.
How to Appeal Against a Penalty
You can submit a CIS penalty appeal if you believe it was issued in error or if you have a reasonable excuse for non-compliance. You can appeal online through HMRC’s online service or by writing. Appeals must be made within 30 days of receiving the penalty notice.
Once the request is submitted and reviewed, HMRC offers three resolution options:
- Submit New Information: Provide additional details or evidence to the HMRC officer handling the case and request a reconsideration.
- Request a Review: Ask for the case to be reviewed by a different HMRC mediation officer who has no prior involvement with the matter.
- Escalate to a Tribunal: If unresolved, arrange for an independent tax tribunal to hear and decide on the appeal.
Tip: Acting promptly and providing clear, accurate information increases the chances of a successful appeal.
How to Appeal via CIS Online
One quick way is to submit an appeal through CIS Online by selecting the “Appeal a Penalty” option. All you need to do is select the specific penalty using the unique ID from your penalty notice. Once your appeal is submitted, you can check the result under the “Generic Notice” section.
FAQs on CIS Penalties
Contractors may face higher deduction rates (30%) for unregistered subcontractors and could be held accountable for any compliance failures related to reporting or verification.
No, CIS penalties are not tax-deductible as they are considered a consequence of non-compliance rather than a business expense.
While CIS penalties do not directly affect credit scores, unresolved penalties can lead to financial strain, legal action, or difficulties securing loans due to poor tax compliance.
In cases where the appeal is rejected, you can request a review or escalate the matter to a tax tribunal for further resolution.
Get Expert CIS Advice
Contractors often struggle to balance business operations and tax duties. Hiring a CIS expert will help you stay compliant with your CIS obligations, and, if facing any issues, appeal to HMRC against CIS penalties. Legend Financial has been handling CIS tax matters on a daily basis since the scheme began. Reach our CIS tax experts today!
